Photographer: Simon Dawson/Bloomberg

Brexit, Political Strife No Deterrent to Sterling Bond Market

  • Issuance volume four times higher than first-half of 2016
  • Two-thirds of sterling debt sales from non-U.K. borrowers

Brexit, a minority government and an end to central bank asset purchases propping up the bond market have not deterred companies from issuing new debt in the U.K.’s embattled currency.

Corporates have raised more than 19 billion pounds issuing sterling bonds this year, four times the volume raised during the first half of 2016, according to data compiled by Bloomberg. About two-thirds of that came from non-U.K. companies including Anheuser-Busch InBev SA, which raised 2.25 billion pounds across three maturities in May, and AT&T Inc., selling 1 billion pounds of 20-year notes on June 15.

“It is quite surprising there is so much appetite for sterling with all the uncertainty around,’’ said Marco Baldini, the head of European bond syndicate at Barclays Plc, the bank that’s managed the highest volume of corporate sterling deals in Europe, the Middle East and Africa this year, according to a Bloomberg league table. “There is solid demand and money behind the market, and this theme will continue into the second half of the year.”

Swap Costs

While uncertainty over the U.K’s future relationship with the European Union may deter some from sterling exposure, borrowers can benefit by issuing in pounds and swapping proceeds into other currencies. While the Federal Reserve aims to increase rates gradually in the U.S., central bankers in the U.K. have kept borrowing costs low amid slowing growth.

“Most international issuers will look at the swap costs and take advantage when in their favor,’’ said Luke Hickmore, an Edinburgh-based senior investment manager at Aberdeen Asset Management, who bought sterling bonds issued by Clydesdale Bank Plc and AT&T.

Britain also offers issuers a large investor base, with assets of 5.7 trillion pounds across multiple asset classes managed in the country, according to data compiled by the Investment Association. The pool of money managers is consolidating, however, with mergers between fund firms such as the planned tie-up between Aberdeen and Scottish rival Standard Life Plc, leading to a more concentrated investor base.

That may eventually diminish the allure of Britain as a source of capital, according to Barry Donlon, UBS AG’s London-based global head of capital solutions.

For international issuers “there’s already a feeling that they can be slightly held hostage to a small group of large investors,” he said. “As that continues the relative attractiveness of that market versus the dollar market or euro market starts to decline.”

The popularity of sterling among corporate bond issuers remains robust for now, however, as illustrated by the Bank of England winding down its quantitative easing program 11 months earlier than originally scheduled without any measurable interruption to the flow of transactions, said Baldini at Barclays.

“Despite the fact the BoE is no longer buying, investors remain interested and the market is trading very well,” he said.

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